European Council Publishes Draft Compromise Directive on Global Minimum Tax

On March 12, the Council of the European Union published a compromise (updated) text of the Draft Council Directive on ensuring a global minimum level of taxation for multinational groups in the EU. The initial draft Directive was proposed on December 22, 2021 for the implementation of the 15% global minimum tax agreed to as part of the OECD’s two-pillar solution for international tax reform, which will apply to MNE groups with annual group revenue of at least EUR 750 million.

Changes in the compromise text include several amendments in regard to the timing of different aspects of the Directive:

1) a new deadline for the Member State to transpose the Directive into its national legislation. Previously, it was December 31, 2022, the newly established date is December 31, 2023; correspondingly, the deadlines the provisions start applying to fiscal years change from December 31, 2023 to January 1, 2023;

2) addition of provisions to allow an EU Member State to delay the application of the income inclusion rule (IIR) and the undertaxed payment rule (UTPR), the GloBE rules, if few in-scope groups are headquartered in the Member State. In particular, it is provided that Member States in which no more than ten ultimate parent entities of groups in scope of the Directive are located may elect not to apply the IIR and the UTPR for each fiscal year beginning as from December 31, 2023 to December 31, 2025.

The Directive was discussed during a meeting of the Economic and Financial Affairs Council on March 15, 2022. As a result of the discussion, it was reported that that large multinationals, with a combined annual turnover of at least EUR 750 million, will be taxed at a minimum rate of 15%. The new rules will reduce the risk of base erosion and profit shifting, and ensure that the largest multinational groups pay the agreed global minimum rate of corporate tax.

As it is known, the minimum effective tax rate (“Pillar Two”) is based on two main rules to be applied in domestic law (“GloBE rules”): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low-taxed income of a constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which allows an entity making an intra-group payment to an entity whose low-tax income is not subject to tax under an IIR to deny a deduction of that payment or require an equivalent adjustment.

These rules introduce an effective tax-rate test that is calculated on a jurisdictional basis and that uses a common definition of covered taxes and a tax base determined by reference to financial accounting income. They apply to multinational enterprises with a turnover of at least EUR 750 million in their financial accounts. The minimum tax rate, for both the IIR and the UTPR, is 15 %.

In order to ensure that the implementation of the GloBE rules is consistent and compatible with EU law, on December 22, 2021, the European Commission presented a proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union. It presents an adjustment to the OECD Model Rules, justified by the need to comply with EU primary law: whereas the OECD Model Rules require the IIR to be applied only to foreign entities, i.e. those established in a different jurisdiction from that of the group’s headquarters, it is necessary for the IIR to also apply to domestic entities in order for the Directive to comply with the freedom of establishment.

Moreover, the adoption of this Directive will ensure coordination of the national laws of the Member States implementing the Pillar Two and will provide greater legal certainty and stability.

Sources:

Press release of the EU Economic and Financial Affairs Council

Text of the Directive

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